Synopsys (SNPS): At the heart of electronic innovation
Claims of a potential connivance investigation between Synopsys, Inc. (NASDAQ: SNPS) and Huawei Technologies, and Semiconductor Manufacturing International Corp (OTCQX:SUIIF) could be a game-breaking situation due to the domestic threat issue emphasized by the US government. The relevant question in the minds of investors is why would a $48 billion company do this knowing the risks involved? While that doesn’t sound good, Synopsys’ clearance will cause the stock to bounce back. Synopsys is proud to be the hallmark of the world’s most advanced chip design and verification technology. At the heart of its silicon production is the delivery of Smart Everything to customers.
Currently, silicon and semiconductor technology is the foundation of digital transformation. Synopsys continues to improve its software ecosystem, as evidenced by its strong first quarter 2022 results, which reflect growth in its EDA software delivery. The company has seen increased demand for its intellectual property and hardware, including semiconductors. With software integrity exceeding estimates, the company is confident that it will meet the 15% to 20% growth target in 2022, including multi-year margins. With the outcome of the Fed’s investigation of Synopsys still in question, I’ll explain why that title is on hold.
Q1 2022 saw Synopsys record a 10.24% increase in revenue to $1.27 billion from $1.152 billion in Q4 2021. GAAP EPS (diluted) also increased by 56.7 % to $1.99 from $1.27 recorded in October 2021. This increase in revenues is the result of significant investments in innovations, targeted applications and technical differentiation made over the past 5 years. Synopsys also has a solid cash position of $1.27 billion against a total debt level of $580.60 million.
Market Dynamics Synopsys
The company also attributed a strong semiconductor market, increasing differentiation in technology and product execution to strong results. The global semiconductor market, which was worth $452.25 billion in 2021, is expected to reach $803.15 billion in 2028, growing at a CAGR of 8.6%. Apart from increasing consumer electronics consumption, industry growth will be driven by the adoption of artificial intelligence (AI), Internet of Things (IoT) and machine learning technologies. (ML).
With the exception of NVIDIA (NVDA), Synopsys’ market capitalization has significantly outpaced global semiconductor powerhouses such as Taiwan Semiconductor Manufacturing Co (TSM) over the past five years.
Over the past five years, TSM’s market capitalization is up 216.75% while NVIDIA is up 838.35%.
Interestingly, Synopsys’ price return over the past five years was over 310%, almost on par with its rate of market capitalization increase. Intel Corporation (INTC) posted the slowest growth rate at 12% as the company is still reeling from supply bottlenecks around chip and computer production. The companies are seen to be operating on the fundamental importance of chips and electronic devices among customers who continue to show recurring positive revenue.
Yet, the modern world has seen heavy investment from AI startups and hyper-scalers that prioritize design activities. In its Q1 2022 earnings call, SNPS CEO Aart de Geus said its award-winning solution DSO.ai is an autonomous system that drives tools in the design space. DSO.ai’s core feature of accelerating chip performance has seen its product design adopted by 5 of the top 10 semiconductor industry leaders.
In my opinion, the convenience of DSO.ai makes it a strong contender in the critical revenue stream section of Synopsys. It helps in deep design space optimization with its cloud computing exploitation feature. Towards the end of 2021, Synopsys announcement that its DSO.ai achieved the highest frequency and lowest power consumption for advanced mobile designs for Samsung (OTC:SSNLF).
As a leader in Electronic Design Automation (EDA), I think the $50 million increase in revenue for the second quarter of 2022 is, to say the least, modest. First and foremost as the market leader in providing EDA tools and technologies, Synopsys controls a huge percentage of the $8.9 billion markets. Its innovative products include the DC NXT, TestMAX and IC Validator NXT. It offers market leadership with AI-enhanced tools and AI-powered apps that are cloud-ready.
EDA tools contribute up to 65% of Synopsys revenue after 35 years of investment and runtime. The company is a strong provider for semiconductor intellectual property, an industry it has invested in for 20 years and contributes 25% of its revenue. As an emerging leader in software integrity, Synopsys has invested up to 7 years in the industry which now contributes up to 10% of company revenue. In the last twelve months (TTM) period to 2022, its total contribution amounted to $400 million, indicating a significant revenue share in the year.
As the world’s largest provider of EDA software used in chip design, Synopsis is partnership with Microsoft (MSFT) to launch the Synopsys Cloud. This solution will run on the Microsoft Azure Cloud service to give chip engineers on-demand access directly from the cloud. What we do know is that designing modern chips takes many years with engineers tasked with using EDA software to automate the steps. This is a complicated 3D design process that requires more computing and EDA resources. With Synopsys, Microsoft customers will have simplified access to a custom framework for all of their chip design requirements.
After generating annual revenue of $4.20 billion in fiscal 2021, Synopsys has set its target for fiscal 2022 in the range of $4.775 billion to $4.825 billion (a rate growth of 14% to 15%).
Synopsys’ revenue growth since October 2017 of more than 14%, with projections showing it will reach $5.35 billion by Q4 2023. To ensure the success of the recurring revenue model, Synopsys hopes to make advance its non-cancellable backlog to 2023. As of the first quarter of 2022, the company reported a backlog of $6.9 million. This backlog will provide financial stability through the economic cycle as the company continues to invest in long-term growth.
In its future Smart Everything, Synopsys seeks to design a new electronic architecture that will integrate computing and smart sensors. Part of the high-impact markets that will benefit from this revamp is the Internet of Things (IoT) where the smart home and wearable device industries are attracting diverse customers across all segments.
In the artificial intelligence market, the deep learning chipset sector is expected to reach $72 billion by 2025.
Synopsys’ software integrity business segment, which contributes up to 10% of company revenue, faces headwinds from security testing products and services. Security vulnerabilities persist even in the open source software segment. In a report dubbed “2022 Open-Source Security and Risk Analysis”, (OSSRA) Synopsys found that outdated open-source software had multiple vulnerabilities from an operational and maintenance perspective.
In the report it was stated,
Still, more than half of the codebases we audited still contained license conflicts and almost half still contained high-risk vulnerabilities. Even more troubling was that 88% of the codebases [with risk assessments] contained outdated versions of open source components with an available update or patch that has not been applied.”
However, the company reiterated the importance of maintaining an accurate and up-to-date inventory of open source software used in their code to reduce the option of vulnerability.
The outcome of the US Commerce Department’s investigation into Synopsis’s potential technology transfer to Huawei and SMIC could damage the company’s reputation, especially if it is indicted.
Synopsys continues to benefit from a perpetual increase in revenue, with the second quarter expected to generate up to $50 million in revenue guidance. The company is a market leader in providing EDA and emerging as a major competitor in providing software integrity services despite the challenges of open source software. We believe the ongoing investigation to establish technology transfer to Huawei and SMIC will have a significant impact on the stock’s performance going forward. For these reasons, we offer a holding rating for the title.